UP Fintech - Earnings Call - Q4 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the UP Fintech Holding Limited Fourth Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Wednesday the twenty fifth, twenty twenty. I would now like to hand the conference over to your first speaker today, Mr.

Clark Sosie. Thank you. Please go ahead.

Speaker 1

Thank you Rachel. Hello everyone and thank you for joining us for the call today. UP Fintech Holding Limited's fourth quarter twenty nineteen earnings release was distributed earlier today and is available on our IR website at ir.itiger.com as well as GlobeNewswireServices. On the call today from UP Fintech are Mr. Wu Tianhua, Chairman and Chief Executive Officer Mr.

John Zhang, Chief Financial Officer Mr. Huang Lei, CEO of U. S. Tiger Securities and Mr. Kenny Zhao, our Financial Controller.

Mr. Wu will give an overview of our business operations and discuss corporate highlights. Mr. Zeng will then discuss our financial results. They will both be available to answer your questions during the Q and A session that follows their remarks.

Now let me cover the safe harbor. Today's discussion will contain forward looking statements. These forward looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. Any forward looking statements that we make on this call are based on assumptions as of today.

But we do not take any obligation to update these statements except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Wu. Mr. Wu will make remarks in Chinese which will be followed by an English translation.

Mr. Wu, please go ahead with your remarks. Good evening, everyone, and thank you very much for attending the Tiger Brokers twenty nineteen fourth quarter and full year earnings conference call. Before I elaborate on our business results, I would like to make a brief comment on the virus pandemic. Since we operate platform,

Speaker 2

there

Speaker 1

has not been a substantial impact on our business. However, the health and safety of our employees is paramount and our firm has taken extra precautions. At our global offices, employees are working in shifts or from home. I will now continue with my prepared remarks. In the fourth quarter, Tiger delivered impressive financial results.

Total revenue was $20,000,000 a new all time high and nearly 110% increase over the same period last year. In the 2019, we achieved the fastest year over year revenue growth of any quarter last year. In addition, I would like to highlight that we continue to optimize our revenue mix. Interest related income, which is interest income plus financing service fees, exceeded commission income and accounted for 38% of total revenue. 2B revenue, which includes our corporate services, IPO distribution and ESOP administration services increased to 26% of total revenue.

This is compared to 2018 when 74 of our income was derived from commissions. In the fourth quarter, we recorded our first ever non GAAP operating income of US0.3 million dollars a significant improvement from a non GAAP operating loss of US2.8 million dollars in the same period of 2018 and a 1,300,000 loss in the 2019, demonstrating the improvement in Tiger's operating efficiency and earnings quality. We are also pleased to report that our innovative platform and differentiated services continue to drive ever more investors to choose Tiger to manage their assets. In the fourth quarter, we added approximately 11,300 new accounts with deposits, an increase of 86% from the same quarter in 2018. In addition, total client assets increased to $5,100,000,000 a nearly 114% increase from the same period in 2018 and an increase of $1,300,000,000 in the 2019.

In aggregate, our 2019 financial results evidenced a solid improvement over 2018. Total revenues in 2019 were $58,700,000 a 75% increase over 2018. We also achieved consecutive non GAAP profit for the 2019. 2019 was a monumental year in the history of our company. In March, we successfully listed on the NASDAQ and embarked on a new journey in our company's history.

2019 was full of challenges but we remain focused and continue to emphasize transparency and made positive progress on our business. I would now like to highlight four key components of our corporate strategy that we successfully implemented over the last year. First and foremost, we are following our strategy of shifting from relying on clearing counterparties to developing our self clearing capabilities. Self clearing will not only reduce our expenses and drive increased interest income, it will also limit the impact to revenue from commission volatility. This was our reason for acquiring Marsco in July.

System integration is on track. We expect to gradually self clear U. S. Cash equities for the end of the 2020. Second, our strategy to increase our international reach progressed nicely in 2019.

Besides our New Zealand office, we now have a presence in The United States and Singapore. We are confident that our international expansion will increase our customer base and give us access to more business development opportunities. Third, our ESOP business and IPO underwriting delivered strong growth in 2019. In 2019, we participated S.

IPOs, in 12 of which we served as underwriter. We were the number one IPO underwriter in terms of deal number for Chinese issuers in 2019 by a wide margin and the scale of our IPO business greatly exceeded that of any other Chinese broker. Besides the contribution to our revenues, we view the development of our investment banking services as beneficial to our reputation and accretive to user stickiness. Our ESOP business also grew rapidly in 2019. We developed a large client base in just one year's time and it started to yield results.

I am pleased to report that in the fourth quarter over 20% of newly funded accounts came from our ESOP customers. In addition, we are investing in our asset management business. Tiger's actively managed Cash Plus product has delivered good investment returns for our users since launch. We also recently launched our Fund Mall where users may choose from over 30 investment funds. We view brokerage and asset management as complementary as our growing range of services increases user stickiness.

Over the long term, this strategy will comprehensively develop commissions, interest income and asset management fees, diversifying our revenue and increasing customer lifetime value. Finally, after discussion and agreement by the Board of Directors, we have decided to implement a share buyback program. Over the next twelve months, we will allocate a maximum of US $20,000,000 to ADS buybacks. In conclusion, we look forward to continuing to implement these four aforementioned points of our corporate strategy and growing our business. I would now like to invite our CFO, John Zhang to discuss our key financial results.

Speaker 2

Thanks Tianhua. Thanks Clark. Hello everyone. Overall, very strong fourth quarter for Tiger. Total revenue was US20 million grew more than 100% year over year and 30% quarter over quarter.

Commission income was US7.3 million dollars increased 4% from last year and 17% from previous quarter. Cash equity blended commission was eight bps this quarter versus five bps same quarter last year. Financing service fee increased 18% year over year to $2,000,000 this quarter. Interest income grew more than 100 times year over year to $5,500,000 this quarter as we have more consolidated account customers versus last year. The growth for financing service fee and interest income also both benefited from increased margin and securities lending activity this quarter.

Other revenue primarily consists revenue from corporate services such as IPO underwriting grew close to 700% year over year to $5,100,000 We were very active in IPO underwriting last year. In terms of deal counts far exceeded any of our competitors. It's also effective customer acquisition to develop retail institutional business. Comparing revenue composition with fourth quarter last year, we are happy to see revenue mix is getting more healthy. Interest related income this quarter accounted for 38% of total revenue.

Corporate services accounted for 26%, while in the fourth quarter last year, commission accounted for 74% of the total revenue. Interest expense grew to $1,500,000 this quarter due to more consolidated account customers. After interest expense, net revenue was $18,500,000 a 94% increase from same quarter last year. Now switching to expense. Clearing expense increased from $100,000 in the fourth quarter last year to $900,000 this quarter, in line with our growth of consolidated accounts.

Salary expense increased 61% to 10,600,000.0 primarily due to a 49% headcount increase year over year. In 2020, we will keep adding key positions, but our headcount growth rate will moderate. Expense increased 72% to $1,100,000 as we opened offices in New York and Singapore. Communication and market data expense also grew 100% year over year to $1,900,000 as more users are using our services. Marketing expense decreased 25% year over year to $1,700,000 this quarter as we optimized our marketing strategies, which netted to higher efficiency.

General and administrative expense increased 14% to $12,800,000 primarily due to business expansion and professional services. Total expense for fourth quarter was $100,000 an increase of 46% year over year. Operating loss was $700,000 this quarter, an improvement of 80% year over year. Non GAAP operating income turned positive for the first time at $300,000 compared to a non GAAP operating loss of $2,800,000 last year. Net loss for FinTech was $600,000 in the 2019 compared to a net loss of $2,000,000 in the 2018.

Our net loss of $600,000 this quarter was primarily due to a $1,900,000 foreign currency exchange loss we let it out as other expenses. Let me elaborate a little bit more on this FX loss. As of now, we booked majority of our revenue and the high assets in New Zealand entity. Under New Zealand regulation, financial reporting needs to be in local currency, which is New Zealand dollar, while most of our revenue and asset inflows are settled in USD or Hong Kong dollar on a daily basis. So when our New Zealand entity prepares local financial reporting on a monthly or quarterly basis, there will be difference due to different exchange rate when revenue and the letter asset are booked and when reporting is done.

So in the fourth quarter, New Zealand dollar has been gradually raising against the U. S. Dollar and Hong Kong dollar. So we booked this difference as a FX loss. So it was low FX transaction took place and low cash loss.

It's just a pure accounting treatment to reconcile the difference between our consolidated book and local book. And our non GAAP net income was US0.3 million dollars this quarter as compared to US1.2 million dollars non GAAP net loss in the 2018. So to summarize, we are satisfied with our progress in the fourth quarter. Revenue mix is more balanced. New accounts with deposits showed a steady growth quarter over quarter and year over year.

And the total client asset also grew at a fast pace. We are confident as long as we execute the strategies laid out in Tianhe's earlier remarks, we can deliver good growth for 2020. This concludes our prepared remarks. Now we can open for questions.

Speaker 0

Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Li Bin Liu from HSBC. Please ask your question.

Speaker 3

Thanks management. I have three questions today. First one is that why is our trading volume down Q on Q but commission income up Q on Q? And second question is about the liquidity and risk management. Could management share with us these liquidity situations and also the margin calls situations recently especially during this month?

And a third question is about the competitive advantage. So what's the competition strategy for us as we have seen that a lot of similar Internet brokers for overseas securities trading recently have spread up in China and also invested by some Internet companies quite a lot of apps are joining this competition. So what do you think is our competitive advantage compared to all these competitors? Thank you.

Speaker 2

Thanks, Nimi. I will answer your question number one and number two. Then Tianhua will answer your question number three. Okay. So let me answer your second question first, what's the liquidity issue or how we manage the risk.

So at Tiger, we have really, I would say very prudent margin policies. So we do have a team of risk managers to monitor Kai's positions especially during this volatile time. So to answer your question, there was no margin call or any principal losses we have experienced so far. We will keep exercising our prudent strategies going forward to make sure with volatile market backdrop, we're not going to suffer any losses in those spaces. And to answer your first question, the trading volume difference and commission, the blended commission.

So at Tiger, we do have a lot of people trading futures and also a lot of people trading equities. So if you just lose the use the overall trading volume to calculate a blended commission, I think sometimes it's getting more volatile. It's not really a good indicative commission of how we operate our business. So we give you the pure cash equity commissions, which means it's more stable. So the reason it increased from five bps in twenty four fourth quarter twenty eighteen to eight bps in fourth quarter twenty nineteen is because in The U.

S. We charge by shares. And in fourth quarter twenty nineteen, there are people trading more low dollar amount shares, which means even though the total value looks low, but actually there are more shares to be traded. So that's why our cash equity commission has gone up from twenty eighteen fourth quarter. Okay.

Let me just quickly translate. So the landscape of brokers actually brokerage business has been around for a long time. Same as the reason we started our business six years ago is we think there are a lot of areas we can improve and there are a lot of optimization we can do. So compared to other Internet brokers, especially those new startups, first of all, Tiger has a lot of licenses, for example, in The U. S, in Australia, Singapore, New Zealand.

And it took a while will take a while for those net newcomers to get all relevant license and knowledge and know how to run those broker dealer business. So that's one differentiator we have. The second differentiator is most of those online brokers, especially China online brokers, they don't have U. S. Self clearing license and they cannot clear trades by themselves.

That's the reason we acquired Moscow. We hope we can be able to self clearing The U. S. Once we become self clear, it can create a huge barrier of entry because we are really building the infrastructure of brokers from bottom up. And this will take a long time and for the newcomers to catch up.

The third thing is on the product offering is what we want to do is to enhance user experience with different type of product offering. So Tiger pioneered IPO subscription for Chinese ADRs. And typically retail investors they most likely will get most allocation from Tiger. During the past years we participated in those IPOs like PDD and Zoom and also give us a competitive edge in terms of how we offer different differentiated product to retail investors. And also, we have those fund modes and cash products, those net wealth management product.

It's also a lot of way for us to try to have a comprehensive product offering to enhance user experience. So combine those three points together, I think there is there will always be competition, but I think these are the differentiated factors can set us apart.

Speaker 0

Thanks both. Your next question comes from the line of Daphne Poon of Citi. Please ask your question.

Speaker 4

Hi, management. Thanks for taking my question. So also three questions from my side. The first one is regarding the other revenue. So there's a big jump in the fourth quarter.

I understand that part of that is because of the IPO subscription. But can you just help us break down how much is from different categories? Like how much is from the IPO underwriting related? And also how much is from the interest income on the bank deposits? And whether you see that strong other revenue will be sustainable going forward?

And the second question is regarding the current rate cut cycles. Have you done any analysis? Like what would be the impact on your earnings and whether that will affect the pricing on your margin loans as well? And the last question is about regarding the recent coronavirus situation. I'm actually wondering whether that has benefits you in terms of your new plan growth and also your turnover because we understand that from some of your peers and also from the onshore Chinese investors that the trading activity in the stock market actually picked up quite a bit during this like virus outbreak.

So I just want to get a sense the trend you see in Q1. Thanks.

Speaker 2

All right. Thanks, Stephanie. So let answer your question two first, then Tianhua will answer question three. And for number one, Tianhua and I will split, because I think that's two questions actually in question number one. So in terms of the rate cuts, I think your question is how is that going to affect our business, right?

So the rate cut on the liability side because we don't have much debt or loan. So it doesn't help us to reduce any funding costs. But going forward, we are looking at opportunities to put on debt because right now if the liquidity is cheap as nice as we can generate decent return on spread on that, that's something we will consider. And I ask this side, for the first quarter, I think it's still okay interest income. For the third starting from second quarter, we will wait and see.

Because right now a lot of banks, they lowered their interest rate to zero. And also our partners may our clearing brokers partners, they also lowered their interest rate to zero. So if you just look at the second quarter, it could have an impact on our interest generating income. But how big is that impact is yet to see because we just started the zero interest rate cycle. But still we still have some bank compilers offer interest rates above zero.

So we will efficiently allocate our cash or our client asset to make sure we can generate returns out of the idle cash. To your first question, in the other revenue section, I would say IPO related is more than 80%, I would say 85% of the composition. The rest of the 10% to 15% is from interest income of the bank deposits. And I will let Tianhua answer your third question about the coronavirus, how does that impact our trading volumes? The other revenue very sustainable first.

So what Tianhua mentioned is still right now the pipeline is very strong. Even some of those nine potential issuers, okay, listed is still very strong and we are working with a lot of them to help them with preparation because we are a fintech company. We do right now we do a lot of online NDR and roadshow for those guys to help them to the pipeline is very strong and we still think the business going forward can generate decent returns. Okay. So just briefly recap what TianHu mentioned is the right now the coronavirus caused a lot of volatility in the market, especially in The U.

S. Market. So the volatility first of all give us give people got more people are interested and got their attention to invest in The U. S. Market and give people the two way opportunities they can shore and they cannot.

So given Tiger's reputation in this in U. S. Market, it actually does help us to generate more accounts with deposits and also help us to generate more customer trading volume. So in short, it does help our trading patterns and with our brokerage business.

Speaker 3

Okay. That's very helpful. Thank you.

Speaker 2

Thank you.

Speaker 0

Your next question comes from the line of Han Fu of CICC. Please ask your question.

Speaker 5

Hi management. Thanks for taking my question and first congratulations on the strong quarter. I have two questions. First is about the Fund Mall. Could you introduce more on the new business and what kind of ways do we plan to charge the investors as well as the fund companies, maybe the possible fee rates compared to the peers?

And second line is about the customer acquisition. We have 11,000 new customers with deposits in the fourth quarter. And how many of them were from the Mainland China and the other from overseas regions? Do we have any guidance on the customer acquisition in the coming year as well as the region allocation as we try to do more international business? Thanks.

Speaker 2

Okay. So to answer your first question for Han regarding the Fan Mo. So the rationale we are doing Fan Mo is traditionally Tiger has a lot They like to trade by themselves, but we also have a lot of customers who don't really know what to buy. So we want to have Fangwa those mutual fund products on our platform to give people more choice and we also diversify our product offering from active trading to passive trading, so we can capture all the needs of our customers.

So how we're going to make money is we're going to make work with our partners on selling and also on fund administration fees. In terms of customer acquisition, so going forward, once we our operation is fully on the ground in Singapore, U. S, Australia, we target to have on a quarterly over a year by end of this year at least 10% of our new accounts are coming from international new clients. And also one thing to mention is we hope our ESOP also accounts for about like 20% of the new clients on a yearly basis.

Speaker 5

And may I have a follow on question on the AUM of our cash plus product currently.

Speaker 2

Right. Okay. So our cash plus AUM right now is still relatively small. It's about like a $25,000,000 USD at this moment. But recently it has been growing pretty decent because the seven days return given the volatility has been pretty attractive daily.

That's not a that's like one part I managed by our in house asset management team.

Speaker 5

Got it. Thanks very much.

Speaker 0

Your next question comes from LiVi Lu from HSBC. Please ask your question.

Speaker 3

Hi. Just a follow-up question on the Cash plus product. It's now the extremely low rate environment. Are we seeing any margin pressure for this product? And also just wondering the latest update of the Hong Kong license, what's the obstacles that we are facing for applying for that?

Thanks.

Speaker 2

So to answer your first question on the cash plus, we don't have any margin pressure because we first of all, it's not levered. And also like we invest in very liquid products like TPOs and other fixed income. Far we don't have any margin pressure. And then your question regarding the license, we don't really come on the license, but I think you can follow our release once we have something to publish.

Speaker 0

There are no more further question at this time. I would now like to hand the conference back to today's presenters. Please continue.

Speaker 1

Hello. This is Clark. I would like to thank everyone for joining our call today. I am now closing the call on behalf of the management team here at UP Fintech. We do appreciate your participation in today's call.

If you have any further questions or concerns please reach out to our Investor Relations team. This concludes the call and thank you very much for your time.

Speaker 0

Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may now all disconnect.